Cf Answers

Homework solutions Ch13 12. One of the ways to think about market inefficiency is that it implies there is easy money to be made. The following appear to suggest market inefficiency: (b) strong form (d) weak form (f) semi-strong form

13.

The estimates are first substituted in the market model. Then the result from this expected return equation is subtracted from the actual return for the month to obtain the abnormal return. Abnormal return (Intel) = Actual return – [(−0.87) + (2.02  Market return)] Abnormal return (Conagra) = Actual return – [0.40 + (0.40  Market return)]

Ch14

10.

a. Gross profits Interest EBT Tax (at 35%) Funds available to common shareholders b. Gross profits (EBT) Tax (at 35%) Net income Preferred dividend Funds available to common shareholders $ 760,000 266,000 $ 494,000 80,000 $ 414,000 $ 760,000 100,000 $ 660,000 231,000 $ 429,000

Ch15

14.

a. b.

€5  (10,000,000/4) = €12.5 million

Value of right 

(rights on price)  ( issue price) 6  5   €0.20 N1 4 1

c.

Stock price 

(10,000,000  6)  12,500,000  €5.80 10,000,000  2,500,000

A stockholder who previously owned four shares had stocks with a value of: (4  €6) = €24. This stockholder has now paid €5 for a fifth share so that the total value is: (€24 + €5) = €29. This stockholder now owns five shares with a value of: (5  €5.80) = €29, so that she is no better or worse off than she was before. d. The share price would have to fall to the issue price per share, or €5 per share. Firm value would then be: 10 million  €5 = €50 million

ch16

21.

a.

(i) The tax-free investor should buy on the with-dividend date because the dividend is worth $1 and the price decrease is only $0.90. (ii) The dividend is worth only $0.60 to the taxable investor who is subject to a 40% marginal tax rate. Therefore, this investor should buy on the ex-dividend date. [Actually, the taxable investor’s problem is a little more complicated. By buying at the...